Frank T. Delaney
In practice, construction firms are in business to achieve profitability. Construction companies operate in a highly competitive business environment characterised by low profit margins and high failure rates. At times firms will seek to grow in an attempt to increase profitability. At other times, firms will be concerned with survival and avoiding failure. Often firms plagued by poor performance seek to take higher risks. This may lead, especially where resources exist, to increased diversification. Against this background, the research focuses on the twin areas of corporate financial performance and the effects of merger activity. Prior studies in economics and accounting provide evidence that financial statement analysis can be utilised by possible investors or strategic planners to aid in the future plans and direction of the firm or to classify economic events such as mergers or failures. The present study examines the financial performance of the UK construction industry and the global construction industry, and investigates the financial characteristics of merging construction companies. This research examines the financial performance of UK firms in different sectors of the construction industry. This analysis involves the use of descriptive statistics, which provides a valuable aid in the visual presentation of the range of possible outcomes. In addition, a probabilistic analysis of the distribution of profitability has been undertaken. This involves the use of inferential statistics, which concentrates on the role of significance testing. The profitability performance of the plant hire sector was found to exceed that of the contracting and materials sectors. An examination of the impact of the national environment on international competitive performance and an assessment and comparison of the performance of global construction are also provided in the study. The research also investigates the financial profile of UK failed and solvent firms. The use of statistical models and accounting ratios in an effort to predict company failure for up to five years is examined. The results for the univariate analysis indicate that failing construction firms during the 1996–2001 period have low profitability and are highly geared. The testing of previous statistical failure prediction models provides little evidence of compatibility with the construction industry. The analysis of mergers and acquisitions investigates the performance of construction companies involved in the acquisition process and examines the motives behind the merger process. Analysis of the relation between measures of costs and firm size in over 100 UK construction companies indicates the usefulness of economies of scale. However, the evidence suggests that beyond a certain size the cost benefits appear to become exhausted. Large companies have to re-examine scale to ensure that they are employing it to their company's greater advantage. Abnormal share returns are also examined throughout a period surrounding the announcement of both successful and unsuccessful acquisition and merger bids. The overall results indicate that mergers in the construction industry create wealth for shareholders. The evidence shows significant increases in the performance of the target firms' shareholders over a 40-day event window surrounding the announcement. The results also show that bidding firms experience no significant abnormal returns in a short period surrounding the announcement date.